Western Refining shareholder challenges merger

Western Refining operates an oil refinery in East-Central El Paso. A federal lawsuit seeks to stop the proposed $6.4 billion sale of Western to Tesoro Corp. of San Antonio.(Photo: RUDY GUTIERREZ/EL PASO TIMES file)Buy Photo

A Western Refining shareholder claims in a new federal class-action lawsuit that the El Paso oil refiner's board of directors filed false or misleading information regarding its proposed $6.4 billion sale to Tesoro Corp. and he wants the deal stopped until shareholders receive additional information.

Srini Vasan, a small Western shareholder who lives in New Jersey, claims the company's information filed with the U.S. Securities and Exchange Commission was false or misleading because the board accepted the proposed sale without determining whether other, better deals would be available and used a flawed financial analysis of the deal.

The company's founder and board Chairman Paul Foster, company CEO Jeff Stevens and board member Scott Weaver led sale negotiations with Tesoro, an oil refining company based in San Antonio, even though they had "clear conflicts of interest," including owning more than 22 percent of Western stock and signing an agreement with Tesoro requiring them to vote for the proposed sale, the lawsuit claims.

Western Refining is undervalued in the proposed sale, the lawsuit further claims, because the $37.30 per share Tesoro agreed to pay for Western shares is well below the stock's 52-week high price of more than $40 per share. The stock closed at $35.45 per share Monday on the New York Stock Exchange, but had been selling at $38 per share last week.

Officials at Western and Tesoro, which also is named as a defendant in the lawsuit filed Jan. 4 in El Paso's federal court, said the companies do not comment on pending litigation.

Lawyers for Vasan were unavailable Monday to comment on the lawsuit.

Western and Tesoro filed a joint registration statement Dec. 14 regarding the proposed merger with the SEC. The lawsuit alleges that is the document with false or misleading information.

Shareholders of both companies must approve the deal for it to go forward. No date has been set yet for the votes.

The proposed sale is expected to be completed in the first half of this year, pending approval by shareholders and regulators, the companies announced in November.

If the merger is completed, Tesoro would have 10 oil refineries in eight states with the capacity to process 1.1 million barrels of oil a day — making it one of the major oil refiners in the United States.

Vasan purchased 1,000 shares of Western stock on Aug. 29, according to the lawsuit. The stock closed that day at $24.48, or $24,480 for 1,000 shares. Those shares are worth $37,300 with Tesoro's $37.30 offer.

On Nov. 16, the day the Western board approved the proposed sale, Western's stock closed at $30.50 — 22 percent below the $37.30 Tesoro offered shareholders. But the stock surged to close at $37.55 — slightly above Tesoro's offer — on Nov. 17, the day the sale was announced to the public.

Western shareholders also have the option of trading a Western share for a partial share of Tesoro stock equal to $37.30.

Oscar Varela, a professor of finance at the University of Texas at El Paso and an expert on the stock market and publicly traded companies, said the shareholder might have filed the lawsuit to send a signal to other Western shareholders that more information is needed, or, Varela said, he might be opposed to the deal because the stock price has climbed in recent weeks.

A sale usually involves a premium price that is 20 percent or 30 percent above a company's stock price, Varela said. Western's current stock price is now below that threshold, Varela noted.

Varela said he's not a legal expert, but "my feeling is the court won't really want to deal with this unless the shareholder approached the Securities and Exchange Commission" about the alleged violation of SEC regulations.

Barclays Capital Inc., which was hired by Western's board as its financial adviser for the Tesoro deal, determined that the per-share offer to shareholders was fair, according to Western's SEC filing. And in a special telephonic meeting with the board before the board approved the deal, Barclay representatives gave a preliminary view that getting a better deal from other buyers was unlikely, the lawsuit noted.

The lawsuit claims Barclays also had conflicts of interest because it had earned millions of dollars in fees from Western in the years preceding the Tesoro deal, and Barclays also earned significant fees as financial adviser to Northern Tier Energy in its $1.4 billion sale to Western in June, the lawsuit noted.

The Western board approved the Tesoro deal "less than five months later and before Western's stockholders could reap the benefits of the Northern Tier acquisition," the lawsuit states.

The lawsuit also claims the proposed sale to Tesoro is unfair because of several things that protect Tesoro's purchase, including a $120 million termination fee that Western agreed to pay if Western terminated the proposed deal.